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Randy: 'My understanding is that the shorts can only "borrow" real available shares.'

That's in theory. In practice, there's also 'naked shorting', i.e. shorting a stock without having access or title to it. Of course it's illegal, but when did that stop Wall St. from anything?

"In a "naked" short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period. As a result, the seller fails to deliver securities to the buyer when delivery is due; this is known as a "failure to deliver" or "fail."

For further information on short selling, naked short selling, and threshold securities, please see the Division of Trading and Markets' Key Points About Regulation SHO. Additional information relating to the SEC's activities relating to short selling can be found in the SEC Spotlight on Short Sales."

http://www.sec.gov/answers/nakedshortsale.htm
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